# Flexible Budgets and Standard Costs

Chapter 22

Prepare a flexible budget for the income statement

Static Budget

 Prepared for only one level of sales volume

Flexible Budget

Prepared for several different volume levels within a relevant range

Separates fixed and variable costs

Variance = difference between actual and budget

Favorable – actual amount increases income

Unfavorable – actual amount decreases income

3

Prepare an income statement performance report

Actual

Results

Flexible Budget based on actual number of outputs

Static Budget based on expected number of outputs

Flexible Budget Variance Sales Volume Variance

5

### Sales Volume Variance

Master Budget

(for the expected number of units to be sold)

Flexible Budget

(for the number of units actually sold)

### Flexible Budget Variance

Flexible Budget

(for the number of units actually sold)

Actual results

(for the actual number of units to be sold)

6

Output units

Sales revenue

Variable costs

Fixed costs

Total costs

Operating income

Actual

Results at

Actual Prices

41,000

White Pro Company

Income Statement Performance

Year Ended July 31, 2011

Flexible

Budget

Variance

-

Flexible Budget for Actual # of

Output Units

41,000

Sales

Volume

Variance

7,000

\$ 215,000

85,000

107,000

192,000

\$ 23,000

\$

\$

-

6,000

6,000

12,000

12,000

U

U

U

U

\$ 215,000

\$

79,000

101,000

180,000

35,000

\$

\$

19,000

9,000

-

9,000

10,000

Static

Budget

34,000 F

F \$ 196,000

U 70,000

101,000

U 171,000

F \$ 25,000

7

Identify the benefits of standard costs and learn how to set standards

Budget for a single unit

Each unit has standards for:

# Quantity Price

9

Direct materials

• Consider early-pay discounts, freight-in, and receiving costs

• Managers look for ways to cut costs

Direct labor

• Consider pay rates, payroll taxes, and fringe benefits

• Accountants work with human resource managers

• Accountants work with production managers

• Appropriate allocation base chosen

10

Direct materials

• Consider product specifications, spoilage

Direct labor

• Consider time requirements

• Use of time-and-motion studies and benchmarking

• Based on overhead application rate

11

Price Standard Quantity Standard

Direct Materials Responsibility: Production managers

Factors: Purchase price, discounts, delivery, credit policy

Responsibility: Production managers & engineers

Factors: Product specifications, spoilage, production scheduling

Direct Labor Responsibility: Human resource managers

Responsibility: Production managers & engineers

Factors: Wage rate, payroll taxes, fringe benefits

Factors: Time requirements

Manufacturing

Responsibility: Production managers

Factors: Nature and amount of resources needed for support activities

12

Helps managers:

 In budget preparation

 Target levels of performance

 Identify performance standards

 Set sales prices

 Decrease accounting costs

13

Actual Price

X

Actual Quantity

Standard Price

X

Actual Quantity

Standard Price

X

Standard Quantity

### Total Cost Variance

14

 Measures how well the business keeps unit costs within standards

(Actual Price x

Actual Quantity)

OR

(Actual Price

– Standard Price)

(Standard Price x

Actual Quantity)

Actual

Quantity

## (AP – SP)

x AQ

15

 Measures how well the business keeps unit costs within standards

( Standard Price x

Actual Quantity)

OR

(Actual Quantity

– Standard Quantity)

(Standard Price x

Standard Quantity)

Standard

Price

## (AQ – SQ)

x SP

16

Actual

Results

Flexible Budget based on actual number of outputs

Static Budget based on expected number of outputs

Price

Variance

Efficiency

Variance

Flexible Budget Variance Sales Volume Variance

### Static Budget Variance

17

Compute standard cost variances for direct materials and direct labor

 Gather necessary data:

Identify fixed and variable costs

Compare actual results with flexible budget

Prepare flexible budget based on standard costs

Compute actual quantities and prices of materials and labor

19

### Direct materials price variance

(Actual Price – Standard Price)

Actual

Quantity

## \$145 U

20

### Direct materials efficiency variance

(Actual Quantity – Standard Quantity) Standard

Price

2900 yards – (1000 units x

3 yards)

\$1.10

\$110 F

21

Actual price x

Actual quantity

Standard price x

Actual quantity

Standard price x

Standard quantity

\$1.15 x 2900 = \$3,335 \$1.10 x 2900 = \$3,190 \$1.10 x 3000 = \$3,300

Price variance

\$145 U

Efficiency variance

\$110 F

Total materials variance

\$35 U

22

### Direct labor price variance

(Actual Price – Standard Price)

## \$325 F

Actual

Hours

23

### Direct labor efficiency variance

(Actual Hours – Standard Hours) Standard

Price

650 hours –

(1,000 units x 1 hour/unit)

\$10.00

\$3,500 F

24

Actual price x

Actual hours

Standard price

Actual hours x Standard price x

Standard hours

\$9.50 x 650 = \$6,175 \$10.00 x 650 = \$6,500 \$10.00 x 1,000 = \$10,000

Price variance

\$325 F

Efficiency variance

\$3,500 F

Total labor variance

\$3,825 F

25

Analyze manufacturing overhead in a standard cost system

27

Standard

Standard quantity of the allocation base allowed for actual output

28

 Shows how well managers controlled overhead costs

Flexible budget overhead for actual output

29

 Occurs when actual production differs from expected production

Flexible budget overhead for actual output

Standard overhead allocated to actual production

30

Record transactions at standard cost and prepare a standard cost income statement

 Materials inventory and Manufacturing wages are recorded at standard prices

 Unfavorable variances are recorded as debits; favorable variances are recorded as credits

 Work in process inventory is recorded at standard quantities and standard prices

32

DATE

GENERAL JOURNAL

DESCRIPTION

Materials inventory

REF DEBIT

(@ standard price)

CREDIT

Direct materials price variance (if U-debit, if F-credit)

Accounts payable (@ actual price)

To record purchase of direct materials

33

DATE

GENERAL JOURNAL

DESCRIPTION

Work in process inventory

REF DEBIT CREDIT

(@ standard price & quantity)

Direct materials efficiency variance (If U-debit, if F-credit)

Materials inventory

(@ standard price & actual quantity)

To record use of direct materials

34

DATE

GENERAL JOURNAL

DESCRIPTION

Manufacturing wages

REF DEBIT

(@ standard rate)

CREDIT

Direct labor price(rate) variance

(If U-debit, if F-credit)

Wages payable (@ actual rate)

To record labor costs

35

DATE

GENERAL JOURNAL

DESCRIPTION

Work in process inventory

REF DEBIT CREDIT

(@ standard rate & hours)

Direct labor efficiency variance (If U-debit, if F-credit

Manufacturing wages

(@ standard rate & actual hours)

To allocate direct labor to production

36

DATE

GENERAL JOURNAL

DESCRIPTION

REF DEBIT

(actual costs incurred)

CREDIT

Various accounts

To record actual overhead costs incurred

Work in process inventory

(standard OH rate x standard allocation base )

To allocate overhead costs to production

37

DATE

GENERAL JOURNAL

DESCRIPTION REF

Finished goods inventory

DEBIT

Work in process inventory

To record completion of goods at standard cost

CREDIT

Cost of goods sold

Finished goods inventory

To record the cost of goods sold at standard cost

38

DATE

GENERAL JOURNAL

DESCRIPTION

REF

To record overhead variances and close out the

DEBIT CREDIT

39

Any Company

Standard Cost Income Statement

Year Ended July 31, 2011

Sales revenue at standard

Sales revenue variance

Sales revenue at actual

Cost of goods sold at standard cost \$\$,\$\$\$

Manufacturing cost variances

Direct materials price variance

Direct materials efficiency variance

Direct labor price(rate) variance

Direct labor efficiency variance

Cost of goods sold at actual cost

Gross profit

Operating income

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